Question

A firm has return on assets (roa) of 15 percent, and debt-equity ratio of 60 percent. calculate the firm's return on equity (roe).

Answer 1

Given that a firm has return on assets (roa) of 15 percent, and debt-equity ratio of 60 percent.

Then, equity multiplier = 1 + Debt-equity ratio = 1 + 60/100 = 1 + 0.6 = 1.6

Return on equity (roe) is given by return on asset multiplied by the equity multiplier.

Therefore, the firm's return on equity is 1.6 x 0.15 = 0.24 = 24%.